UCLA study forecasts 2.2% GDP growth in '03, less than needed for job expansion as spending slows.
June 5, 2003: 8:04 AM EDT
SAN FRANCISCO (Reuters) - With businesses holding off on new investment and consumers curbing their spending, the U.S. economy faces a year of weak growth that will not spur much new hiring, according to a forecast released Thursday.
The widely watched survey issued by the Anderson School at the University of California Los Angeles, said the economy's subdued performance resembles the slow expansion of the early 1990s that was marked by weak gross domestic product and employment growth.
The world's biggest economy also must clear hurdles posed by severe budget problems among state and local governments that have crimped government spending, stripping out an important engine of growth, the report said.
"We are stuck in the mud," said UCLA economist Ed Leamer, who wrote the report. "The year ahead looks very weak."
Leamer forecast GDP growth of 2.2 percent for 2003, well below the 4 to 5 percent expansion that typically creates new jobs for a recovering economy.
Consumers -- who have taken advantage of historic interest rate lows to snap up autos and homes -- do not have much buying power left to spark a strong recovery when businesses finally step in, the forecast said.
"We are going to be chugging along the way we are for a considerable number of quarters," Leamer said, predicting that the unemployment rate will hover around the current 6.0 percent through 2004.
While he added the most likely scenario is for the status quo, Leamer said there is a small risk of another downturn, further delaying any prospects for an interest rate increase by the U.S. Federal Reserve.
The survey forecast core inflation -- measured as the consumer price index minus food and fuel prices-- at 2.3 percent through the first quarter of 2004.
Low inflation gives the Fed more freedom to leave interest rates low and maintain a booming housing market -- another key component to economic expansion, Leamer said. The federal funds rate currently is at a four-decade low of 1.25 percent.
The UCLA forecast predicts housing starts to peak at 1.67 million units in the third quarter before slipping to 1.34 million at the beginning of 2004.
But Leamer cautioned that rising home prices have helped create a housing bubble that could emerge as a drag on the economy, although the most likely outcome would be a "slow leak" rather than a sharp collapse in real-estate values.
"People feel wealthier than they already are but they will feel poorer when their housing values fall," Leamer said.
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